Impact investment: what it is and how to invest

Within the various investment strategies n private capital, we can find impact investing, which seeks to invest in companies that generate social and environmental returns, as well as financial returns.

In this post you can learn about the differences with respect to the rest of the strategies, how it contributes to your portfolio and society and how you can invest.

Impact investment is an investment strategy that incorporates a third element into the famous risk-return ratio. In addition to pursuing a financial return it invests in companies whose aim is not only to generate profit, but also social and environmental returns. This type of strategy takes into account the impact, profitability and risk of an investment.

The companies may have different objectives, such as improving the quality of life of society, protecting the environment, promoting gender equality and increasing access to education and medical assistance.

In spite of the main goal not being the generation of financial returns, unlike other types of investments, it is not considered philanthropy, as it is expected to achieve a certain return, although not everything revolves around it.

Impact investment is as a powerful way to address some of the greatest social and environmental challenges the world is facing.

In fact, according to UN data, an annual investment of between $5,000 and $7,000 billion are required to meet the SDGs; therefore, the private sector plays a key role in channelling this investment.

Aligning moral values and investment. Investors can align their moral values with their investment strategy by choosing projects to which they feel committed. You can invest in companies that allocate their profits from their sales, for example, to building wells in areas with difficult access to drinking water or to recovering deforested areas.

More information. These companies provide more information about the repercussion and impact of their activities, so investors can easily check how their investment leaves a positive mark on the planet and on people.

Greater capacity for adaptation. Due to the nature of their activity, they are able to better adapt to regulatory and legal changes, which are increasingly tending to protect companies that are committed to sustainability.

Source of diversification and decorrelation. Impact investment includes companies from a wide range of sectors (health, technology, education, etc.) and that can undertake projects in any geographical area: from a company that builds schools in areas with low enrolment rates to a technology company that aims to reduce water waste in California.

It also provides decorrelation to portfolios, because this type of companies generally do not follow the trends of traditional investments.

Profitability. There is a belief that investing with an impact can compromise the profitability. However, there are several studies that debunk this, demonstrating that private equity impact funds can equal comparable funds that do not follow this approach (both traditional and alternative).

When investing in this type of strategy, as in any investment, we may face risks. One of the most characteristic is the company not generating as much impact as expected or carrying out greenwashing.

At Crescenta you will be provided access to this strategy, achieving adequate diversification (by geographical area, sector or type of projects, among others) with optimal exposure.

You will also receive professional management. Thanks to the better resources available to managers (GP), the LPs ensure that the best investment decisions are made.

The importance of gaining access to this professional management is even more significant in impact investment. In spite of there being more and more options, we must be sure to invest in companies that really have a positive and measurable impact and achieve a balance between the three aforementioned elements: profitability, risk and impact.

Author

Sofía Cisneros

Communication and content - Crescenta